returned just about 3% in 2012, which was very disappointing
compared to the strong performance by the ETFs tracking other
Southeast Asian nations like Philippines and Thailand.
The underperformance was in contrast to the strong GDP growth
in the country-6.2% for 2012. The IMF expects the country to grow
at 6.3% in 2012. Indonesian stock market had returned about 12%
last year but the currency had taken a beating-resulting in ETFs'
underperformance. (Read: T
he Key to International ETF Investing
Indonesia's economy has grown at an annual rate exceeding 5%
in seven of the past eight years, mainly due to increasing
consumption by its rising middle class (130 million per World
Bank). Also due to thriving domestic demand, which drives about
two-thirds of GDP, the economy is largely shielded the global
Moody's and Fitch have recently upgraded the credit rating of
the country to investment grade. Due to strong economic
expansion, foreign investors have continued to pour money into
Southeast Asia's largest economy.
Foreign direct investment (FDI) reached a record level of
$24.6 billion last year, up 26% from the previous year--despite
some of the restrictive policies adopted by the Government of
late. (Read; Best Latin America ETFs for 2013-
Foreign exchange reserves have risen to $110 billion (as of
October 2012) from about $20 billion in mid-1997, when the
currency declined about sevenfold during the Asian financial
crisis. External debt has declined to 26.7% of GDP in 2011 from
over 150% of GDP in 1998.
Further, as a result of prudent macroeconomic management,
Government debt as a share of GDP has fallen by over 70% over the
last decade and inflation has come down from double-digit to less
than 5% currently. Earlier this month, the central bank left the
key rate unchanged at 5.75% as inflation has remained within its
According to a McKinsey report, Indonesia could become the
world's seventh largest economy by 2030, overtaking Germany and
Thanks to its population of more than 240 million, with mean
age of just 28 years, Indonesia's demographic dividend will be
key driver to its growth. (Read:
Best ETF Strategies for 2013
However, the country recorded its
first annual trade deficit
in 2012, even though a small one ($1.63 billion), as the imports
surged 8.0% while the exports fell 6.6%.
Imports have been rising due to rapid growth domestic
consumption and investment, while the exports have been hit by
deckling global demand and falling prices for commodities.
Further, 20% export tax introduced on mining commodities by the
Government last year also seems to have affected the commodity
Thanks to a weakening the current account position, the
currency took a beating last year; losing 5.9% against the US
dollar, making it the worst performing Asian emerging markets
currency in 2012.
Depreciation worsened in the second and third quarter of last
year on account of global economic uncertainty that led to
decline in portfolio inflows, while the foreign exchange demand
for imports continued to rise. We expect the current account
position to improve this year as the global economy stabilizes
resulting in increased demand for commodities.
Corruption and poor infrastructure remain some of the main
hurdles to faster growth in the country. Recent floods
highlighted the problems related to poor infrastructure in the
IDX seeks to track Market Vectors Indonesia Index, which
provides exposure to publicly traded companies that are domiciled
and listed in Indonesia or generate at least 50% of their
revenues in Indonesia. The fund currently manages $405.8 million
in assets and holds 41 securities.
The fund charges the investors 57 basis points for annual
expenses. In terms of sector exposure, financials are at the top
with 30% weight, followed by consumer staples (16%) and consumer
discretionary (13%). The fund's annual dividend yield is 1.71%
currently. IDX has Zacks ETF rank of 1 (Strong Buy).
iShares MSCI Indonesia Investable Market Index
EIDO tracks the MSCI Indonesia Investable Market Index, which
is designed to measure the performance of stocks in the top 99%
by market cap of the stocks listed in Indonesia.
The ETF holds $445.7 million in 93 securities and is thus must
more diversified than IDX. However, like IDX, this fund also has
largest allocation to financials (35%), and the next two are
consumer discretionary (16%) and consumer staples (12%). The fund
charges 60 bps and pays out a 12-month yield of 1.11% currently.
EIDO has Zacks ETF rank of 2 (Buy).
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ISHARS-MS INDON (EIDO): ETF Research Reports
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